December 18, 2013
Mortgage rates moved higher today after the Federal Reserve announced the first reduction in its purchases of Treasuries and MBS. The reduction in Treasuries hurts mortgage rates indirectly and the reduction in MBS ("mortgage-backed-securities") hurt rates directly as these are the securities that mortgages ultimately turn into.
This is a big deal and it has a big effect on the interest rate landscape. But there is good news, or at least a silver lining. The negative effects on today's rate sheets are far less severe than they might have been. Part of the reason may have to do with how the Fed delivered the message. While they are tapering asset purchases, they also noted that the Fed Funds rate would remain low well past the time that unemployment hit 6.5% (their initial threshold for considering raising short term rates).
While short term rates don't have as much of an effect on mortgage rates as the asset purchases, they do help indirectly by keeping funding costs low for banks making loans. This helped the bond market (of which MBS are a part) avoid more abject damage from the news.
In addition, bond markets have simply been coming to terms with this eventuality for weeks and months--all the way back to May 2013. Especially in the month of November, and again after the December 6th report on Employment, interest rates did a lot to get into position for this potential Tapering announcement, and thus avoided a sharper spike when it actually came.
Almost miraculously, 4.625% remains the most prevalently quoted rate for ideal, conforming 30yr Fixed scenarios (best-execution).
Loan Originator Perspectives
"So the fed decided to taper today, cutting $10billion per month in bonds starting in January. The market seemed to have priced that in as both treasuries and MBS, after some volatility, have settled near where they opened yesterday. Due to the volatility some lenders did reprice worse today. If you floated into today, I would continue to do so and see what tomorrow brings." -Victor Burek, Open Mortgage
"The cat is officially out of the bag. The slow, but steady improvement in the labor market and economy was enough to justify a decision to start a reduction in the MBS and TSY purchases by the Fed. The reduction in each was small enough that it helped prevent a large sell off many expected on an announcement of any "tapering." Maybe this gives some direction and a relative timetable to investor that were curious about how and at what pace they would do this? All in all the recent 2.8-2.9 range on the 10 year is still in play and the longer term 2.75-3.0 is very contained at this point. The trend is still not the rate shoppers friend and I recommend locking any small bounce back or improvements in pricing you see in the short term." -Stephen Chizmadia, Mortgage Advisor, American Capital Home Loans
"Today's Fed statement announced slight reductions in their MBS and Treasury purchases in light of a healing economy. While the long term effects are still unclear, MBS' immediate movement was fairly contained towards slightly higher rates. Nice to see we didn't suffer huge losses, but apparent we're still in a rising rate environment. Hard to see much short term market motivation for lower rates." -Ted Rood, Senior Originator, Wintrust Mortgage
"Locking yesterday was a good move, but even with Taper announced today, rates aren't taking off. Could have been worse so stay tuned. Stocks like it which is a head scratcher." -Mike Owens, VP of Mortgage Lending Guaranteed Rate, Inc.
Today's Best-Execution Rates
- 30YR FIXED - 4.625%
- FHA/VA - 4.25%
- 15 YEAR FIXED - 3.5%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- Uncertainty over the Fed's bond-buying plans and Fiscal Policy has been making for a tough interest rate environment where we're not seeing sustained improvement unless it's a correction to even bigger deterioration.
- The Fed's bond buying is the key consideration--not just the initial reduction (aka "tapering"), but the general pace of withdrawal. We've gone from tapering being a "sure thing" in September, to it being on hold until March 2014, and now December 2013 is increasingly possible after the most recent Employment report.
- Markets continue to be most interested in economic data and its suggestions about the longer term trajectory of the economy. This will shape expectations for Fed policy in the coming months, and thus inform the direction of interest rates.
- The stronger the data the more likely the Fed is seen as reducing asset purchases. Rates would rise under this scenario, but the Fed indicated its cognizance of high rates creating headwinds for the recovery, and this suggests they'll attempt to keep the pace of rising rates moderate as long as inflation isn't adversely affected.
- (As always, please keep in mind that our Best-Execution rate always pertains to a completely ideal scenario. There are many reasons a quoted rate may differ from our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).